when the levee breaks - the lang cat

WHEN THE LEVEE BREAKS

kindly supported by

A mARKET ANALySiS REpoRT fRom

WHAT NEXT foR THE UK RETiREmENT

SAViNGS mARKET?

04 foREWoRD

05 THE GLoRioUS DANCE of DEATH: HoW DiffERENT iS LifE NoW?

10 THE LANG CAT’S THiRD LAW of EmBUGGERmENT

15 REGULATioN foR SHoRT ATTENTioN SpANS

17 HoW oNE pRoViDER iS TACKLiNG CLiENT CommUNiCATioN:

BEHiND THE CLoAK AT SCoTTiSH WiDoWS

20 WoUNDED BULL: THE pRiCiNG BiT

30 ANNUiTy foR SALE. oNE pREVioUS oWNER, LoW miLEAGE

34 GHoSTS of ANNUiTy mARKETS yET To ComE

36 BE CAREfUL WHAT yoU WiSH foR: fiNAL THoUGHTS

CoNT ENTS ‘When The Levee Breaks’

If it keeps on rainin’ levee’s goin’ to break


And the water gonna come in and we’ll have no place to stay

Well all last night I sat on the levee and moan

Well all last night I sat on the levee and moan

Thinkin’ ‘bout my baby and my happy home



And all these people will have no place to stay

Kansas Joe McCoy and Memphis Minnie, 1929

(and later, Bob Dylan and Led Zeppelin)

WHEN THE LEVEE BREAKS: WHAT NEXT FOR THE UK RETIREMENT SAVINGS MARKET? WHEN THE LEVEE BREAKS: WHAT NEXT FOR THE UK RETIREMENT SAVINGS MARKET?

THE GLoRioUS DANCE of DEATH: HoW DiffERENT

iS LifE NoW?

those to Pension Wise and public recognition is low). Some

advisers have misgivings about the service given its funding

sources and, overall, its relationship with the advice

community is a tense one.

Then there’s the expectations challenge. Drawdown is

becoming a more familiar term as it filters though into the

mainstream media, but few people are comfortable with the

concept and still fewer will really understand the detail.

Annuities remain the most suitable option for most people

needing a secure income, but all the hoo-ha about pension

freedom makes that just seem so, well, booooring.

For advisers it must feel like dragging a small child around

a supermarket, trying to keep their eyes on the fruit and

hoping they don’t spot the sweets at the checkout. That

might involve being assertive with clients in a way that

might make advisers feel uncomfortable and facing some

difficult decisions when the client sticks to their guns. The

government’s telling them they can be trusted to make their

own decisions – why should they listen to their adviser?

Good luck walking that particular highwire.

GAp oR No GAp?The FCA said in December that it had found ‘little

evidence’ that the RDR had widened the advice gap. The

latest Heath Report reached a very different conclusion,

claiming that 3.5 million clients have lost an adviser who

had already left the industry, with a further 3 million being

attached to an adviser who can no longer service them.

We think Heath is closer – but that the issue may be

transitory while new advice propositions come to market

... and that’s a whole different subject.

Ah, nostalgia. It’s not what it was.

Or is it? We should be told.

So let’s take a closer look at the unholy trinity of advisers,

providers and consumers who are bound together in the

glorious (clap, clap) dance of death1 that is the retirement

savings and income market and consider how different life

really is for each of them following the reforms.

ADViSERSThere was a moment in early 2014 when advisers might have

dared to believe that the pace of regulatory change had finally

eased off. Then, on 19 March 2014, George Osborne lobbed

an unexploded mine into the pensions field and in the process

gave everyone something new to stress over.

And yet, from where we sit (Leith, slightly overcast), things

have changed for the better. The availability of highly

qualified and professional advice has never

been more important for those looking

to get the most from their

pension pot in whatever

form. But the RDR, while

raising the quality of advice,

has undeniably made it less

accessible.

Pension Wise is supposed to

bridge the gap by helping

those unable or unwilling to

pay for advice. Early

indications are that the

service may struggle to

gain traction (at the time

of writing calls to providers

are massively outstripping

1 With apologies to Roger McGough for including his glorious verse in a dreadful pensions publication like this.

foREWoRD Welcome to When the Levee Breaks: What Next for the

UK Retirement Savings Market? Pop your slippers on, make

sure your pipe is loaded with rich, toasted St. Bruno Flake

and check the Daily Mail resting on the antimacassared arm

of the G-Plan chair is the right one for tonight’s telly. Hang

on… What…? We’re not to do that anymore? What about

Lamborghini jokes? We’ve lots of them. No? But…really?

None at all?

OK. So. This is all a bit different isn’t it? Bit of a departure

for us. A tea-dance foxtrot (sorry) step away from our usual

platform nonsense. Well, as Mr Dylan (who also covered

our title song) was fond of saying, “The times, they are a

changin’”. Mind you, he also said “Wiggle wiggle like a bowl

of soup / Wiggle wiggle like a rolling hoop”, which only

goes to show.

We did wonder whether we should bother adding to the

deluge of retirement market material that has flooded the

market recently. Did we have enough to say to make a

report flow? Would it make a splash? Might it sink without a

ripple? Do you see what we’re doing here? With the title?

Water? Levee? Anyway, in the end we decided it would be

rude not to, so we dived right in and surfed the waves of

market analysis. Dived. Surfed. Waves. We’re on fire here.

The underlying theme throughout our report is not ‘what now?’

but ‘what next?’ That levee has well and truly broken and the

market is working through the immediate impact. That’s going

to take time and the longer term picture is still unclear. Also

unclear, as we write, is how the General Election will play out,

and what impact that will have on pensions.

You might have noticed something else different about this

Guide – we have sponsors. Thanks to GBST for helping

us. It’s a first for us and we thought long and hard about it.

We value our independence above everything but

sponsorship means the Guide is available to everyone for

zero poonds. We haven’t taken any wedge from any

provider of retirement products, so what you’re reading

remains completely unbiased.

So, what do you get for your ticket price of nothing at all?

First up we consider how much things have really changed

across the at retirement market. Of course they’ve changed.

But have they CHANGED? With that out of the way, we take

an in-depth view of some of the unintended consequences of

pensions reform. The kind of unintended consequences that

sneak into the banana box of change and then jump out and

bite the unsuspecting, right in the…kitchen.

You can’t step out of the office these days without being

asked to contribute to a consultation paper so we take a trot

through recent regulatory highlights. We also get low down

and forensic with second line of defence, thanks to

Scottish Widows kindly sharing their shizzle with us.

You didn’t think Platform Man would let the secondary

annuity market consultation pass by, did you? Not when it’s

such a good business opportunity. For consumers, that is.

Yes, a good opportunity for consumers. We’ll share our

thoughts on the subject too. Look out for the lizards.

You know us for pricing analysis #heatmaps, and they’re

here too. In a market with more products than the lang cat

has appendages we also had to think long and hard about

the best way to present you with a robust view that didn’t

involve 500 pages of nothing but heatmaps. No matter how

happy that would have made certain members of the team.

Getting back to future-gazing, we look to far-off shores and

consider what lessons we might learn from those brave

pioneers who are well ahead of us in their attempts to beat

annuities to death, and whether all those people really do

have no place to stay. Thanks to Paul Resnik of FinaMetrica

for his wise words on the subject.

And speaking of people who know what they’re talking

about, one final thank you to (award winning personal

finance journalist) Jeff Salway for helping us write the Guide.

So, slipper boots zipped up? Horlicks ready? Lamborghini

fuelled? Sorry, sorry, forgot.

On we go.

Mark Polson

principal, the lang cat


In general though, wasn’t it ever thus? A good percentage of

any adviser’s job is protecting clients from themselves.

Pension reform is simply one to add to the list. So yes, there

is more to do, but at the same time, this change may finally be

the nail in the coffin for many of the old pension policy classes

which hang like an oversized clock around the neck of the

hype man that is…oh, never mind, we’ve stretched that one

as far as we can. We have no doubt here that if there is any

sector of the industry that’s able to suck up pension reform

and deal with it in an adult fashion, it’s the advice sector.

Let’s move on to those with a little more to do.

pRoViDERS Like a runner on a treadmill with a sadistic personal trainer,

providers in the life industry are clinging on in the forlorn

hope that it surely can’t go any faster.

The pensions industry should be pretty adaptable by now.

Anyone that lived through A-Day has surely earned their stripes.

But it’s different this time. The bad news is that when

concurrent developments are chucked in – such as the

sunset clause, new governance standards, the introduction

of Independent Governance Committees and a 0.75%

charge cap on DC schemes used for auto-enrolment – you

have a situation where resources are being stretched to

breaking point. Innovation? Good one. Funny.

The issue here is that none of what we’re talking about has

anything to do with attracting new inflows of pension

monies, unless your job is to convince your board to keep

funding your product development plans, in which case get

the Big Four in, do the 150-slide strategy deck and enjoy

yourself. It’s later than you think.

What it does have to do with, however, is the very guts of every

system you’ve ever built. The ones where ‘money out’ was the

last priority, and where the world worked in an orderly way,

where people stuck to NRD and behaved themselves. The

thing about pensions reform is that it hits every unglamorous

point, and none of the glamorous ones. It’s like a Greek

tragedy: the tragic flaw of the pensions sector is that its cash

cow – its back book – has depended on stability of assets, and

a steady glide path down of outflows. That set of assumptions

just frothed at the mouth, and Tommy Kirk is about to take it out

behind the woodshed. You might need to Google that if you’re

in your twenties or thirties.

We should now have a moment’s silence for those providers

who specialise in annuities. Several are now paying the

price not only for failing to make the market work more

effectively, but also for failing to anticipate where that might

leave them in the long run. Cash flow, assets and income all

take a massive hit in the new world, especially for providers

with books full of small pot holders who are likely to simply

take their cash and either spend it or venture into the Wild

West. Hang on to your Stetson, because we’ll be talking

more about that in the next section.

Anyone prominent in the annuity market saw their share

price take a shoeing as the sun set on Budget day 2014.

Not surprisingly, the depth of this plummeting and the extent

of subsequent recovery has been linked to the scale to

which the business depends on annuities. Or did.

Share price is closing price, adjusted for dividends and splits

If you were diversified pre-Budget, you’ve bounced back. But if you weren’t – well, the

upslope is steep and it isn’t levelling out yet.

The prospect of a second-hand annuity market may be a branch for some to grasp at. Yet

they’ll know in their hearts from the consultation paper that even the government (away from

the front-end spin machine) knows it’s not a straightforward idea. The eventual rules, should

the market become reality, will (we think) be so restrictive as to render it a cottage industry.

PROVIDER SHARE PRICE 18 MARCH 2014

SHARE PRICE 19 MARCH 2014

SHARE PRICE 10 APRIL 2015

AVIVA 457.68 434.13 530.00

JUST RETIREMENT 261.38 150.48 166.90

LEGAL & GENERAL 213.88 195.97 278.85

PARTNERSHIP 308.53 138.22 141.00

PRUDENTIAL 1,313.78 1,285.94 1,716.00

• Most people want a guaranteed income from their

pension pots, even if they’re not planning to buy

annuities.

• Then again, an awful lot of people have no plans at all

for their pension pots, even those about to retire.

• This is partly because understanding of the reforms

and their implications remains low. But then if providers

still can’t get their heads around it, what chance the

man in the street?

• There’s no great appetite for raiding the pension pot

and taking all the cash, but plenty of people will be

drawing decent chunks of their pension.

• Drawdown will be popular, but a lot of people plan on

getting their cash out of their pension and investing it

elsewhere. This presumably includes those wanting

guarantees and downside protection.

Mass, unplanned outflows of assets. Previously advised

clients wanting counselling but no ongoing relationship.

Systems that can’t keep up. New guidance on guidance and

advice. Auto-enrolment. While advisers have it tough, we’d

argue that providers have more on their plate than anyone

else in our glorious (clap, clap) dance of death2.

Oh, and they should probably dismiss any crazy notion that

someone might finally stop shifting the damn goalposts.

Those posts never stay in one place for long, as providers

know only too well.

CoNSUmERS Consumers arguably get the most benefit of pension reforms, but they’re worst placed to really get what it’s all about.

Bigger, richer and smarter folk than us have already been out with the clipboards bothering shoppers or disturbing folk

watching Masterchef about their views on pension reform, so rather than doing more of that, we thought we’d take

a look at all those other surveys. In the research game this is called meta-analysis, which sounds cool. Totally meta.

So what do we know? A few prominent themes did emerge:

ACTioN Let’s take a closer look at some of that research, starting

with what people actually want (or intend) to do with their

pension pot.

Views as to how many are going to take the money and run

are split but the highest estimate that we found is 25%.

Where cash is heading out the door, it may not be going all

that far. For instance, of the 17% BlackRock found to be

intent on clearing out the fund, just over half intend to invest

for income with the remainder staying in cash.

2 Done it again. Sorry, Roger.


However, there’s still a strong preference for leaving well

alone beyond tax-free cash or ad-hoc lump sums.

Fidelity’s research, back in September 2014, looked in more

detail at those retiring in 2015. Of the 54% expecting to take

at least some of their pot as a lump sum, 37% are targeting

the tax-free cash portion, 11% reckon they’ll take a bit more

than that and 6% will grab the lot (rising to 7% of people

polled by NEST).The pension they don’t take in cash will be

chucked into drawdown, 23% and 20% told Fidelity and

NEST respectively and another fifth will combine drawdown

with an annuity. Just 16% simply plan on buying an annuity,

according to both Fidelity and NEST.

Consistency is good, but we rather suspect these guys

might have huckled the same harassed pool of pre-

retirement savers.

While people want to be able to access their fund as and

when they choose, the overriding concern among over 55s

is security and consistency of income for the duration of

their retirement.

What does all of this tell us? Well for one thing, it seems the

nation’s over-55s have been subjected to more random

questions than that bloke who once went for a BBC job

interview and ended up being interviewed on telly about a

court case. It also reveals the degree of uncertainty among

consumers as to what the pension reforms mean and how

they should respond. Guaranteed income good, annuities

bad; pensions freedom is good, so is security, and so on. If

the research we’ve seen so far makes one thing abundantly

clear, it’s that there’s a huge amount of uncertainty out there

when it comes to retirement options.

Some people reckon the shake-up won’t make any difference

to their plans. The extent to which this is the case depends on

who’s doing the asking, however. The FCA found that 45% of

those who were yet to retire had changed their mind about

how to manage their pension as a result of the changes. Yet,

only 15% of Fidelity’s respondents are reviewing their plans

in light of the changes.

It seems that a lack of certainty and confidence in decision

making might lead to paralysis rather than the predicted

exodus. LV= found 55% of respondents undecided on how

to take income under pension freedom, with 25% waiting to

see what new products emerge. Patience is indeed a virtue.

ADViCERecognition that professional advice would be handy in

navigating the retirement income minefield seemed to grow

as 6 April grew closer, with Fidelity reporting an increase in

respondents planning to see an adviser from 35% in June

2014 to 41% in March 2015.

KNoWLEDGEThe extent to which people see the reforms affecting their

plans may reflect their comprehension of what’s happening.

Only half of the DC members polled by the International

Longevity Centre (ILC) had a good understanding what an

annuity was, but 35% claimed to know what income

drawdown was about. That’s more than we would have

expected and we’d question how many of them really know

as opposed to just being familiar with the term.

More than half of retirees admitted to Fidelity that their

knowledge of the new rules wasn’t too good. That might

explain why more than a third of those who expect to

withdraw all or part of their pension pot plan to stick it in

cash, even at the current low interest rates. Confusion over

the tax implications of pension pot raids provides additional

cause for concern. Just one in five DC members

understands what their marginal tax rate is, said the ILC,

making it unsurprising that one in 10 thought the best tax

mitigation strategy would be to take their pot in one go.

And that’s the big risk. Guaranteed income and security

remain a priority but pulling your fund out of a pension and

sticking it in cash isn’t how you get there. We come back to

advice and accessibility thereof for those who need it but

don’t have the fund to make it worthwhile.

CoNCLUSioNIt strikes us that there’s an irony in all of this. Our industry

has been Olympic class at obfuscation and complification

(we maintain that’s a real word) for so long – in the interests

of chiselling a little more out of pension savers in particular

– that we have created structures and products the like of

which mankind was never meant to wot of. Only actuaries

even pretend to understand this stuff. And now, when we

give the people who were given the fuzzy end of the lollipop

the chance to get the hell out, they want to.

But we are hoist by our own petard; providers are now

hamstrung by the very complexity which protected VIF and

PVNBP and all the other made-up measures that we used

so we could pretend the legacy world, with its commission

and its churn, was viable.

So is life really different now? Our friends in adviser firms

and providers have an understandably bullish view. It’s a

new dawn. A new age has sprung. But all that is built from a

world-view which hopes, hopes against hope, that allowing

people to get money out of a broken pensions system will

encourage other people to put more money into the same

system. We have a suspicion that if we were to go and do

some clipboard work, the phrase ‘a plague on all your

houses’ would have some resonance.

Life is different now – especially for providers of back-book

pensions, and of course for clients. Advisers will do what

they’ve always done (if they’re any good) – put the client

first and deal with the product landscape as a necessary

evil, a bit like flossing.


We are what we are, us humans. We want what we want, and need what we need, preferably now. We’re also venal, greedy and lazy, and will take the path of least resistance to get it.

Unfortunately, some among us are also, er, entrepreneurial, and not necessarily moral. Now the levee has broken,

all kinds of new vagabonds, cutpurses and ne’er-do-wells are hoving into view.

So in this section, then, we’ll look at what we think are five of the more unfortunate unintended consequences of the new

freedoms. We invoke here the lang cat’s Third Law of Embuggerment, which states that any given piece of financial

regulation or legislation will always bump up a client’s total charge load, even if it’s meant to cut it.

1. THE WiLD WESTSteve Webb’s been a good pensions minister. But what he’ll

be remembered for is his Lamborghini moment, when he

insisted that people could spend their newly liberated pension

cash on whatever they liked. Quite apart from inflicting brand

damage to an extent not seen since that time Tony Blair pulled

on a pair of Levis, this wasn’t a helpful statement.

For one thing, the notion of the

nation’s wealthier baby-boomers

using their pension pots to

connect with their inner Jeremy

Clarkson is, frankly, disturbing.

Also, a horse might have been a

more appropriate mode of

transport, given the scope for all

manner of Wild West banditry

under the new rules.

The Wild West was all about

the spirit of freedom and

operating on the periphery of

authority. By liberating retirees

from the yoke of providers the

reforms might allow many of them to prosper. The changes

should be a Good Thing for a lot of people. But by removing

a fair bit of protection they also have the potential to be a

Bad Thing. We have heard of nuance, and have no truck

with it.

Consider this: consumers have heard about the whole

pension freedom thing and quite fancy getting their hands

on their accumulated hard-earned. But it’s tricky isn’t it? All

that paperwork and the phone calls and deciding what to do

with it. And yes, you can get advice, but that’s expensive

isn’t it? And then comes the phone call, or even one of

those adverts on ITV3, offering to take the whole thing out

of your hands. Turn your pension pots into one lump sum for

a small fee. No fuss, no muss. For those paralysed by the

thought of all the hassle this might be well worth the 2% or

whatever they’re charging.

None of this can happen without a SIPP scheme to catch

the monies, and this is where much of the real defensive

work will need to happen. We think SIPP providers – large

or small – need to ask themselves these three questions:

• Are you comfortable with the source of these assets and

the process of how they have reached your products?

• Are these the right customers for you, or should you point

them in the direction of something more suitable?

• Can your systems and service levels handle the extra

business coming in without falling over?

Some mainstream drawdown providers have introduced or

increased charges for clearing out drawdown contracts set

up after the 6 April, effectively protecting their business

model and consumers against this type of scenario. While

we’re not a fan of exit fees, these are reasonable and we

can see the logic behind them.

These questions are just the beginning, because there are a

lot of new issues for platforms and SIPP firms to think about

as they watch their AUA numbers swell. They can succumb

to the temptation to cut corners and get assets in more

quickly, or they can take the long-term view and in doing so

help protect consumers by keeping the cowboys out of town.

This isn’t about ‘jam tomorrow’, it’s about not putting the jar on the edge of the shelf so it breaks all over the floor.

2. THE DUTy of CARE VS SELf-pRESERVATioN SmACKDoWNAdvisers have as much to gain from the new pension regime

as any part of the industry – but the same caveats apply.

The challenge of somehow servicing increased demand

while maintaining the integrity of your business model, doing

the right thing for the client and keeping to the letter and

spirit of regulation is a formidable one.

Take, for example, someone that wants to draw a lot more

cash from their pension than you think is wise, and not only

for tax reasons. They threaten that if you advise against their

wishes, they’ll take the DIY road, even though you know

they don’t have the required knowledge or experience.

Doing the right thing means recommending the most

suitable option. But if you bend to the insistent client’s will,

you might at least prevent them from inflicting even more

long-lasting damage on their retirement finances.

Advisers should be clear

on what to do in such a

scenario: as Keith

Richards of the PFS

said, ‘walk away’.

But how many times can

you do that? How many

clients can you allow to

leave? How many times

can you block client

wishes without driving

them away? What if they’ve been on your books for years

and have been paying ongoing adviser charges – does that

change anything? Will the regulator start asking questions if

too many clients do choose to go against your advice? Do

you have a minimum fee caveat on your literature and

website for retirement advice? Should you? Why do we use

so many rhetorical questions?

Just to add a little further cheer, neither the FCA nor the

Financial Ombudsman Service (FOS) recognise insistent

clients in paid-for financial advice. So, if you think tucking an

IC declaration into the file will protect against future problems

by itself, think again. This point was clarified in the context of

DB to DC transfers but it stands for any advice event.

So, how can we make concord of this discord?

Wording.

Yep, wording.

Or, smarter suitability wording. Effectively communicating

what’s best for the client in a way that makes sense to them.

Doing this in tandem with a decent risk profiling exercise will

make it easier, especially if it covers the client’s

psychological willingness to take risk, their risk capacity and

long-term objectives.

Be specific: relate it to their own concerns and objectives.

How would the client feel about reaching, say, 80 and

having to worry about paying the bills? How unhappy would

they be if they were unable to leave a planned inheritance?

Such an approach still plays on fear, of course, so getting

people to visualise more aspirational possibilities is vital too.

Want to eat out once a week or enjoy a weekend away

every month? Then what income would you need for that to

be sustainable? Real world stuff.


4. moTHER HUBBARD GETS AN AGA High-end car dealers aren’t the only ones excited about the

latest pension reforms. Ikea and Homebase are apparently

feeling pretty good too. And with some justification.

Hymans Robertson reckoned that some £3bn of the

estimated £6bn cash taken out of pension pots in the early

months of the new regime would be spent on home

improvements, cars and the like.

That’s fair enough, because a lot of those dipping into their

pensions to buy kitchens and conservatories will have

pension pots too small to buy a decent income from an

annuity. In 2013 the average pension pot used to buy an

annuity was £33,670, according to the FCA, while the ABI

puts the average pot at £36,000 (where no benefits have

been taken).

Fair enough, of course, until you remember how long it has

to last. Stat break:

• One in four people is likely to live for 30 more years once

they’ve hit 65, Partnership Assurance research suggests.

• Men and women underestimate their life expectancy by five

and eight years respectively, Hymans Robertson found.

The pensions minister (at the time of writing) is remarkably

relaxed about this. “If you take your pot of, say, £30,000,

and you do spend it over 10 years, have you run out early or

have you exercised precisely the freedom we wanted you to

exercise?,” he asked. “You enjoyed it and then intend to live

on your state pension and, perhaps, other savings. Is that

the wrong outcome?” We’ll leave that one with you.

Is it ok to tell people not to spend their pension cash when

they’ve been diligent enough throughout their working lives

to build up it up? It might not be wrong but we don’t see it

going down well. Our suggestion is to reframe it. Take the

example of someone spending half their pot on a new

kitchen. That’s fair enough, but not if it means they won’t be

able to cover the weekly food shop further down the line.

There’s not much point in having a flash new kitchen if

there’s no food, or if they can’t use it because they haven’t

paid their gas bill.

No one wants to blow their pension too early, unless they’re

really daft or have a highly optimistic view on the state

pension. But it does happen – it’s a common occurrence in

Australia as we’ll see later on and they’ve been doing this

pension freedom malarkey for years. The problem lies in the

understanding of how long it can last at the rate at which it’s

taken and spent.

Those clever number crunchers at Hymans Robertson had a

good idea; a pension statement ‘traffic lights’ information

system like you see on food labels. Or endowment policy

statements (not sure if they come in green, though). It may

sound simplistic, but it’s barking up the right tree.

It seems fair, then, to give the last word to Hymans who

conclude that failure to innovate in this area will mean that

“many who have saved conscientiously for decades with us

will then overspend out of ignorance”.

Presentation is important too. A barrage of negative stats

might be counterproductive, so keep it concise, positive and

completely free of jargon. No pictures of happy old people

on the beach. And probably not being kneecapped by a loan

shark either.

And here – yours for free – is our top tip on this particular

subject: go through your wording with someone who

doesn’t work in the industry. There’s a big difference

between the average pension provider or adviser’s idea of

plain, jargon-free language and the ‘normal’ person’s idea of

what ‘clear and easy to understand’ looks like. If you’ve

been in the industry for more than six months you might be

amazed at the extent to which it’s corrupted your vocabulary.

UFPLSs, anyone?

3. mAyBE HiT iT WiTH A BiGGER SpANNER?Providers are no strangers to change, having made it through

A-Day and then the RDR. They were both pretty big at the

time but this all makes the RDR look like a subtle tweak. It

really is quite the disturbance. Pension freedom is, in short,

one massive headache. Particularly for life companies.

Why so much? Well, this time it’s not just about products,

distribution or getting assets in. It’s largely about ways of

money leaving the premises. Yes, we’re talking about the

grubby, grungy and not-at-all shiny back office stuff. How do

you make money from that? And crucially, how do you sell the

need for IT resource and budget to drag the infrastructure

up-to-date to facilitate assets moving off the books?

For some, there is a decent chance that the changes will

present opportunities for inflows in the form of consolidation.

Even then margins on flexible access business look

distinctly ordinary to us, however, and certainly nothing like

those on annuity books.

New legislation was being published right up to day zero,

including some pretty crucial pointers on DB transfers, the

consultation on cashing in existing annuities, Pension Wise

and the second line of defence (or additional protection if

you prefer). All this while trying to get the tech organised

and in working order. This is (and will continue to be) a

bigger challenge for some firms than others – most notably

those with big legacy books.

So if someone comes along brandishing a 1995 policy and

asking about this new flexibility they keep reading about,

what happens? Chances are that their contract just isn’t

compatible with this brave new world. An internal transfer to

a newer, post-millennial plan might be the easiest way out,

but even that will be beyond the wit of some internal

systems. There may be a cost to the client and certainly a

hassle factor. We’re back to duty of care versus resource

and profitability.

But, everything else aside, some people had waited long

enough and were chomping at the bit by the time 6 April

came around. They’re not going to hang about when they

do finally get their hands on their cash, especially if the

service has been a bit rubbish. Off to see the wizard they

go, skipping down the yellow brick road marked Freedom

and, in some cases, towards a proper fleecing.


5. LifESTyLiNG: Sooooo pRE 6 ApRiL 2015, DARLiNG It was pretty clear that lifestyle strategies as we know them

were effectively obsolete before George Osborne even

finished his 2014 Budget speech. Anything obsolete must

be replaced, ideally with highly lucrative alternatives, and

fund houses aren’t known for looking gift horses in the

mouth. We don’t see them starting now but they still have a

few jumps to clear before reaching the final furlong. Enough

of the horse theme, it’s getting filly.

So, there’s a significant amount of bunce in lifestyle funds

but the classic de-risk from equities to bonds on approach

to retirement strategy is designed for the ‘cliff-edge’ of

annuitisation and so is just not fit for purpose post-April

2015 (if it ever was). Having your pension in annuity-

matching bonds at retirement isn’t much use if you’re

planning to keep your pot invested. If bonds display any kind

of correlation to equities in future, they don’t help you if you

want the cash either.

In other words, if the landing site is changing then the glide

path has to be tweaked too.

However, most workplace and personal pensions still

default into lifestyle strategies, including NEST (which is

reviewing things). Research published in October 2014 by

Pensions Insight magazine found that 74% of DC schemes

still used lifestyle strategies, 70% of which were reviewing

their default options following the Budget. That alone is a

game-changing opportunity and one that clearly tilts the

odds in favour of asset managers able to offer glide path

options more suited to investor needs. Factor in even

cautious CAGR and margin and we’re talking serious

revenue for those who can get the proposition right.

Asset managers were taking more interest in the retirement

income market even before the Budget, not least in

recognition of favourable demographics (by 2050 almost

one in four Britons will be over 65, according to the OECD).

Now the demands of that market will favour asset managers

even more, with increased focus on risk-based outcomes.

Those with experience in markets such the US, Canada and

Australia should be feeling particularly smug.

The glide path may be changing but working out where it

should now lead to, and how to get there, is the challenge

facing the fund industry. They might have the kit, the experience

and the strategies, but do they know the DC market well

enough? In other words, and paraphrasing Ghostbusters, they

have the tools but do they have the talent?

Possibly not, which is why some asset managers are currently

spending a fair bit of time and money developing a deeper

understanding of the ‘end investor’. Those that are ahead of

the game in this respect are typically the fund houses with US

parentage (Fidelity and JP Morgan spring to mind).

Firms of that ilk also have valuable experience in strategies

that would appear tailor-made for the newly liberated DC

market. Multi-asset funds are already dangerously close to

being flavour of the month, but you ain’t seen nothin’ yet.

Their built-in diversification and downside capital protection

would seem to make a lot of sense for pension investors,

particularly those paying an income.

Multi-asset funds are massive in the US and in the UK

institutional market, being held by more than eight in 10 UK

pension funds, according to Barings, up from 65% in 2013.

In our retail space they’re still in their infancy, but that’s

changing. The big players in this market, such as

Standard Life Investments, Aviva Investors, Schroders

and JP Morgan, have been joined since the Budget by

others including L&G, BlackRock and Threadneedle.

Target-dated funds will get a look in too, having become a

big deal across the pond. Some fund houses see them a

natural successor to lifestyle funds, with the glide path of a

target-date fund designed around drawdown instead of

annuitisation. The idea is that asset allocation and

weightings are adjusted in line with the investor’s risk profile

on the glide path to retirement. There’s a similar ploy at work

with income targeting funds, with Birthstar among those

doing interesting things.

This probably gives us a clue as to what providers of

lifestyle funds might do next – adapt their existing strategies

to base their lifestyling on different member segments and

their pot sizes.

This is the chance for asset managers to get some skin in

the game. But they need to know who they’re dealing with

(and the outcomes they want) and they have to get the

distribution stuff right.

You don’t need us to remind you of the unmanageable amount of papers and updates in circulation. How on earth do you keep on top of it all?

EASY. You simply turn to Leith’s leading independent

platform, pension and investment consultancy3. We got your

back on this, as we do on so many other things.

We took a total of 540 pages across 10 consultation papers,

guidance papers and supporting research and fed them into

the patented lang cat Informational Condensing Facilitator

(with bi-directional upgraded shredding module). And hey

presto – a couple of pages covering (what we think are) the

important bits and a few self-test questions for those of you

who haven’t read a text book in the last couple of weeks and

miss the helpful structure to guide an otherwise uncontrolled

thought process4.

WoRKpLACE SAViNGS Two big things loom on the horizon – DB to DC transfers to

access pension freedoms and auto-transfers.

DB-DC first. Finding the right balance between protecting

the best interests of members who choose to transfer and

protecting the scheme itself for everyone left behind is the

dilemma at the heart of the consultation document: DB to

DC transfers and conversions from The Pensions Regulator.

It states that “trustees have a duty to act in the members’

best interests” but with interests divided it’s not that

straightforward. Far from it.

The paper suggests that advice for those with pots above

£30,000 might be a must. But many a mickle maks a

muckle, as you know, and it’s going to be those pensioners

at the smaller end of the CETV scale who’d rather have the

fund than a miniscule pension each year.

Then we have the new requirement for

trustees to check that a member has

obtained “appropriate independent

advice” before carrying out a transfer.

This is more of an admin capacity threat than one of

stripping out schemes. There are many reports of transfer

request bottlenecks – how many of them will come to

fruition with the double challenge of protecting the member

and protecting the scheme? Based on the magic words “we

believe it is likely to be in the best interests of the majority of

members to remain in their DB scheme” there had better be

a very solid and extremely well documented case for

transferring out.

As far as we can tell, advisers are (sensibly) reacting by

declining to touch the whole situation with a ten foot pole.

We don’t blame them but where does that leave the ones

who still want to transfer out and need that “appropriate

independent advice”?

It’s been talked about for what seems like ever but auto-

transfers or ‘pot follows member’ is nearly upon us. The

DWP’s Automatic transfers – a framework for consolidating

pension savings contains the skinny. It’s being phased in

from Autumn 2016 and will only apply to contracts set up

from July 2012 where the pot is both less than £10,000 and

invested in a charge-capped default fund.

REGULATioN foR SHoRT ATTENTioN SpANS

(Source: Hargreaves Lansdown)

3 Probably. 4 Not really.


Being realistic, it’ll be the next generation of lang cats writing

about whether it’s made a real difference to serial job

hoppers. What we get to focus on now is the pain (probably)

of getting the system on its feet without too many casualties.

We like that any cost of inefficiencies will be carried by those

schemes rather than being passed on across the board.

We’re less convinced on how the whole thing will hang

together. The DWP has opted for a network of registers

instead of a single entity. Apparently this reduces the risk of

the whole operation being taken out in an alien attack.

There’s a lot about “register-to-register interaction”,

“standardised data” and “straight through processing” and

we’d love to be as confident as the TPR sounds but we’ve

been around the block a few times now and anything that

involves pensions and various start and end points for data

rarely goes hitch free.

Favourite line of the whole paper? “Automatically

transferring pension pots will increase the number of

pension transfers taking place.” Now THAT’S insight.

ANNUiTiES AND AT RETiREmENTThe sheer volume of investigations and reviews into the

retirement income market merely reinforces the regulator’s

lack of success in this area.

Let’s start in January 2013, when the FSA (in its dying days)

launched a thematic review asking if people were getting a “fair

deal” when buying annuities and looking at the extent to which

people were losing out by failing to shop around. It found

that…yes, of course most annuitants could have secured a

better deal if they’d shopped around. It also (sort of) put the

industry in its place by gently pointing out that the ABI’s Code

of Conduct wasn’t really working that well. No one suffered

from shock in the act of reading this particular report.

This was followed by a retirement income market study

into whether competition was working well for consumers

and how it could be improved followed. Someone,

somewhere apparently needed further confirmation that

“the retirement income market is not working well for

consumers”, and they duly got it.

Suspicions grew that a senior figure at the watchdog was

running a book on how many different reports could offer

precisely the same statement. We’re being slightly unfair here.

The market study did move things on a bit, reflecting the

challenges posed by the new pensions regime. The creation of

a ‘pensions dashboard’ – an idea that’s been bouncing about

for a while – was among the longer term remedies. That gives

us an indication of where the regulator’s retirement income

market work – including a wider review of its rules in the

pension and retirement area in summer 2015 – is heading.

But you can see where all this is going, clever you. Fast

forward to 2025, when the UK regulator launches a review

into why people are running out of cash in retirement and

whether annuities really weren’t so bad after all. It’s the

pensions industry’s neverending story.

SimpLifiED ADViCE There was a school of thought, post RDR, that the regulator

had missed a golden opportunity to get a simplified advice

model on its feet. GC14/3: Retail investment advice –

clarifying the boundaries and exploring the barriers to

market development picked up the baton on the approach to

pension freedom. It was a game attempt to “clarify the

requirements for providing the various types of service”,

accepting that “a lack of clarity may be inhibiting the

development of different investment sales models” with

finalised guidance, FG15/1 issued in January 2015.

The response was mixed. Advisers noted a lack of

clarification on where the line between guidance or

information and advice actually sits, as well as what

precisely constitutes a ‘personal recommendation’. The

FCA maintains that it’s all about circumstances: “For

example, if information is provided on a selected rather

than balanced basis so that it influences or persuades,

this may be regulated advice”.

As with the second line of defence directive, the FCA was

resistant to the prescriptive measures that some – but not all

– of the industry was calling for. While the FCA

acknowledged that an “expectations gap” between it and

advisers was keeping propositions back that could potentially

benefit consumers, clarity was not forthcoming in FG15/1.

Nor was further enlightenment on another major stumbling

block: namely the FOS’s approach to simplified advice

cases. The FCA’s approach here remains the same – it

depends on the circumstances. So advisers might still be

liable to a claim by an investor who has used their simplified

advice process and emerged with a recommendation only to

then buy it on an execution-only basis. “This is a complex

issue and the question of liability will be dependent on the

facts in a given scenario”, according to the guidance.

Looking forward, we can expect the pattern of more

cycles of consultation and regulation to continue

until it does find a way of clarifying its expectations.

HoW oNE pRoViDER iS TACKLiNG CLiENT CommUNiCATioN: BEHiND THE CLoAK

AT SCoTTiSH WiDoWSNo, not behind the cloak in that sense. Naughty.

Of all the things causing providers anguish over the last 12 months, client communication over pension freedoms and in particular the second line of defence requirements are pretty high up the list. It’s been more of an acute pain than a chronic one as the requirements were only finalised at the end of February, leaving a princely five weeks to finalise wording across literature, websites and call scripts.

But we had heard rumours of serious work being done behind the scenes. Work which, whisper it, might actually meet or exceed FCA requirements and not make consumers want to retreat to a corner with a bottle, the phone number of a therapist and a resigned acceptance that they will never, ever access their pension fund. Ever. It’s just simpler that way, OK? It’s fine. Really, I’m fine. Fine. You keep it.

Frankly, we didn’t believe a word of it. So we got on the cat-phone and made a few calls to see if any providers would let us come and poke around. A couple told us to sling our hooks. A couple hummed and hawed. But a gargantuan thanks attack goes to Scottish Widows for unhesitatingly fronting up and letting us take a peek

behind its cloaky curtain.

THE CLoAKED oNE fiGHTS BACK Scottish Widows has taken something of a kicking in the trade press of late. Advisers have been pretty harsh in their views on the company’s service. But, in the background, a complete re-invention of retirement wake up packs, customer facing website and call handling has been bubbling away.

Wids let us have a play around all parts of it, and to our mind, given what had gone before, that felt like a good approach: to demolish and rebuild. Wids was no worse than most in what it used to do and it was better than some. But the team acknowledged that what was there simply wasn’t fit for purpose, and started again. Let’s look at a few of the big ticket items

they’ve worked on.

CUSTomER fACiNG mATERiAL Wake up packs – as this is most likely the customer’s first contact on the subject there’s a lot resting on its papery shoulders. Issued at 12 months, 6 months and 6 weeks, these are now short and sweet. There’s no 37 page statement in that funny mainframe font, no default roll-over annuity option, in fact not a tick box to be seen. Just a value and some pointers and leaflets (including Pension Wise) about what you need to consider and the next steps. We were impressed with this.

Scottish Widows Retirement Explained website – the customer facing website takes a step-by-step approach going from the basics (surprising numbers of people are

clueless about State Pension entitlement) to options, things to consider (including second line of defence) and how to action the decision. There are also some calculators to help work out exactly how quickly you can run out of money and just how big a slice is going to HMRC. That’s important – one of the findings from the first week (we visited on Wednesday 15 April) was that few, if any, customers understand that they’re going to be paying tax if they cash in their entire fund.

Both the online and offline collateral (marketing language for ‘stuff’) was written by creative professionals, not pensions dweebs. The dweebs got to be involved, but not very much. As a result, the language and register of the new SW material is markedly different.

UFPLS didn’t make it past the guys with the directional hairdos and tattoo sleeves. It’s been renamed PPE (Partial Pension Encashment), which isn’t as good as our GYMBOA (Get Your Money Back Out Again) but is alright, if you like that sort of thing.

Call handling – this splits into inbound and outbound. Inbound is for starting the ball rolling and simpler requests such as cashing in the whole fund. Outbound is for more complicated stuff like drawdown, plans which need an internal transfer and so on.

We were really interested in the call centre work. Many advisers are pretty mistrustful of what’s going on inside providers, and we can understand that. What we found in our work at SW was an obsession with referring clients back to their advisers, to Pension Wise, and to other providers if necessary.

Just to be clear, the lang cat has no

business relationship with Scottish

Widows. It’s not a client and got

absolutely nothing in return for

helping us out other than the warm

glow of having done something nice.


The call centre environment is so heavily constrained that it is completely unrecognisable next to even a rookie advice conversation. We think advisers have little to worry about here. We are also pretty sure that it’s the same with other mainstream providers – they’ve all looked at the advice perimeter guidance from the FCA and are working very hard at staying away from anything that sounds even remotely like advice. Once you accept that not every client can use a financial planner to access £5k of their pension to get the roof done, it

starts to click into place.

Anyway, back to Widows.

Rather than follow a script, call handlers attempt to guide the caller down a relevant path with ‘requirements’ of what must be covered and ‘word patterns’ of how to do so set out for each section. The conversation is driven by the customer’s answers to the questions, with something like 500 possible routes through what ends up looking like a highly, highly complex decision tree.

SW’s bods lay out relevant options (and sometimes, in a desire to be completist, less relevant ones) but its plans to establish which option ‘might be better for you’ were kiboshed by FG15/1. As it is, the call structure

covers a mighty 27 steps (15 more than recovering alcoholics) with outbound calls intended to last between 30-45 minutes. They can take a lot longer, unsurprisingly. The required warnings and questions take up a lot of time (more than half the call) but requirements are requirements. We suspect it’ll settle down slightly as everyone gets used

to the process.

THE LANG CAT VERDiCTOne thing that really stood out for us, particularly with the literature and the website, was that it was actually pretty good. The gimlet eye of the lang cat doesn’t miss much and, on the odd occasion we find ourselves being nice about a provider it just feels wrong. Slightly dirty somehow. But, credit where it’s due and the Morrison Street hipsters (bushy beards optional) have invested some serious time, effort and (no doubt) money. And we think it’s been worth it. It’s not perfect, some of the prompted call responses are laboured and repetitive and could stand being more intuitive or helpful to the client, but it’s early days and the whole proposition is evolving in response to feedback and experience. The one aspect which has probably had the greatest positive impact overall is to largely hand over the writing and vocabulary work to externals who have a vague understanding of how to speak to people without driving them to violence.

Sitting behind all this stuff is product architecture. Wids has a huge back book, and is the pension brand for all of Lloyds TSB, so it covers Halifax and Clerical Medical products as well. All the old products can be cashed in without needing to transfer. Most can offer UFPLS PPE. The soft underbelly is that partial encashment from most older plans (ah, NUPC2, how we miss you) has to be done via

UFPLS PPE; flexi-access isn’t available without a transfer to the Retirement Account product (SW’s new generation pension) and that’s a lot more complex. As a result, people wanting partial encashment are told that their cash will be 25/75 tax free/taxed at this point, and that their maximum annual allowance will drop to £10,000 across all their plans, and that they need to tell any other providers into whom they’re saving that this applies within 91 days.

Should a provider – whether it’s Scottish Widows or not – be stopping to say, ‘hang on, wouldn’t it be better if people took a partial encashment 100% from tax-free cash where possible?’ That would leave more in the fund to grow, assuming the client knows how much they need out as a net figure.

In an ideal world, older products would offer everything. But they don’t, and here’s where the unstoppable force of consumer demand meets the immovable object of legacy systems. Do you stop people getting what they want, force them down an advice route or a lengthy insistent client internal transfer process, in order to (in theory, and without knowledge of their tax affairs) optimise the tax position of the encashment? Or do you say ‘this is what we can do for you via phone/internet, this is what we can’t do, do you want to go ahead with the bit we can?’

Not easy. The right answer is, of course, ‘get advice’. But SW, like most insurers, has hundreds of thousands of small pot pensions, largely from GPPs, where there is no advice relationship, even if there’s an agency on the plan. It needs to find a line of best fit. Whether it’s done it or not – time will tell.

THE SCALE of THE CHALLENGE • 537,000 Scottish Widows clients

age 55+, have access to new freedom.

• 7,500 customers deferred taking benefits over the last year, waiting for the new rules.

• 404 new staff are being taken on (mix of temp and permanent).

• Over 15,000 calls were taken in the first week of pension freedom.

• Up to 5,000 calls are answered

each day.

THE HiGHLiGHTS Starting from scratch and handing the writing and vocab over to externals who know about such things has benefitted the collateral, call process and (hopefully) customer experience.

There is a real lack of awareness and understanding among consumers of the tax implications of pension encashment. Tools and call routes have been designed to address this gap.

Conversations are weighed down by regulatory requirements, making them less intuitive to customers than they might be. But this initial caution will probably settle over time.

SW clearly takes great care to avoid any suggestion of anything even vaguely resembling advice. Pension Wise, advice and shopping around are repeatedly flagged even where client responses appear to rule them out of contention.

All old products from across the business can be cashed in. But partial cash from most of these has to be via PPE (or UFPLS in industry-speak). Flexi-access means an internal transfer to the new-generation Retirement Account which is a much more complex process.


Looking at pricing across the retirement savings market was always going to be tricky, even focusing on the point at which investors can access their accumulated bunce. Working through direct and advised platforms, life companies and SIPP specialists we compiled a list of names which would have created a set of #heatmaps big enough to merit a Guide all of their own.

As fun as that sounded, we ain’t got that kind of time. So just this once, rather than showing lots of

portfolio sizes, we decided to take a selection from each channel, summarise the pertinent charges

and see how that might all work out for a made-up scenario. We did one for each main business area

– direct platforms, advised platforms, SIPP specialists and lifecos. This also works better because –

unlike the platform world – the SIPP world is much more about fixed charges, and all the big tables

would prove is that a fixed charge represents a smaller percentage of a big investment than a small

investment. And while we’re happy to tout basic arithmetic around, even we aren’t that basic.

WoUNDED pRiCiNG BiT

TRUE CoLoURSOne thing you’ll notice about lang cat heatmappery, if you’re not already familiar with it, is all the lovely colouring. This is

what it’s about: we set tolerances for what looks green, amber and red. It’s all based on sums and how one overall charge

compares to another in that particular scenario. So, green for the cheapest, red for the most expensive and various hues

and shades for everything in between. It absolutely does not mean that green is good and red is the embodiment of

everything that is wrong with the world. So, just to be clear, no good/bad, no FCA endorsement/fine or anything like that.

It’s just an easier way of looking at a big list of numbers.

ASSUmpTioNS We’ve used what we believe to be a representative range of

providers for each channel. We’d love to have an exhaustive

list of every provider in the UK but (1) we are limited by the

availability of charging details, (2) some providers have

confirmed that they do not currently offer the new flexible

options and so are excluded and (3) we quite like a couple

of hours off every other weekend.

We work with what advisers (and consumers going direct)

have access to, keeping our experience as close to theirs as

possible. So where data is not readily available, we don’t

include it. We did hit the cat-phone to fill in the odd blank

but that’s nothing an adviser or consumer wouldn’t do.

Core charges for advised and direct platforms are based on

the patented lang cat Recursive Pricing Engine (now with

11.8% less guessing) and the usual assumptions apply.

In short, that means only core custody and wrapper charges

make it in. We haven’t included any trading charges this time.

We include drawdown or UFPLS costs as appropriate.

For the SIPP specialists the core charge is (where

applicable) the basic charge, which assumes the client is

using standard or core investments as determined by

each provider.

SIPP core charges tend to be fixed rather than a percentage

of funds, which benefits larger pots.

A wealth (pun) of event driven charges can apply to SIPPs

such as set-up, in-specie transfer, moving into different

assets, commercial property and so forth. We have

excluded all of these. If enough people ask we might do

some new tables with them in for certain scenarios. Or we

might not. We’re fickle that way.

The figures shown in the pricing tables are all exclusive of

VAT unless stated. The heatmaps are based on total charges

in each case and so include VAT where it is applied.

RULES of ENGAGEmENT1. Our tables are based on published charging data from

provider T&Cs and are correct to the best of our

knowledge. We don’t send these on to the platforms or

providers for verification as we prefer to rely on the

information available to anyone else. However, where data

was not publicly available we did ask and our thanks go to

those who were kind enough to help.

2. Our assumptions and any decisions we made along the

way are noted above.

3. Platforms/providers – if you think we have done you an

injustice then please get in touch and we’ll talk. We’ll

happily correct any mistakes, but be sure of your ground

before you have a pop…

4. Advisers – this is an egg-sucking masterclass but we feel

better if we say it. You know you have a duty to assess

suitability on a much more detailed basis than a quick glance

at a table and a sample scenario. We hope our data helps but

it’s no short cut to proper due diligence.

One last thought before we kick off with the good

stuff. We mentioned that we aim to keep our

process in putting the #heatmaps together as close

to that of an adviser or consumer as possible. There

is often some pain involved but this time we were

frankly stunned at how hard it was to track down

some of the pricing details.

Some were easy; simple to find, well-structured and

clearly written. Others were impossible, with a number

of providers appearing to still not have flexi-access

pricing published more than two weeks after the new

regime went live. This is just not good enough.

Fair enough if you are clear that you’re not offering

the facility, less so otherwise. We’ll come back to

this later in this section.

BULL: THE


Direct Platform

Flexi-access Drawdown (FAD) Setup

Annual FAD FAD One-off Payment

UFPLS Payment

Annuity Purchase

Stripping Out Within One Year

AJ Bell Youinvest

£0 £100 if regular income taken, £50

if not

£75 £75 £150 £295

Alliance Trust Savings i.nvest

£0 £75 £0 £40 £150 Not stated

Barclays Stockbrokers

£75 £100 £0 £75 £75 £250

Bestinvest £0 (although there is an initial calculation fee of £90 for > £100k and £100 for

< £100k)

If income is taken £0 for > £100k,

£100 for < £100k.

£0 Not stated

£75 internal, £100

external

£290

Charles Stanley Direct

£150 £0 £150 Not stated

Not stated

£200

Chelsea Financial Services

£100 £120 Not stated

Not stated

Not stated

£300

Fidelity Personal Investing

£0 £0 £0 £0 £0 Not stated

Halifax Share Dealing

£0 (£90 no VAT if switching from capped to flexi)

£180 (no VAT)

£90 + £25 perinvestment (max

£215) to designateadditional funds (no VAT)

£90 (no VAT)

Not stated

£300 (no VAT)

Hargreaves Lansdown

£0 £0 £0 £0 £0 internal, £150

external

£295

Interactive Investor


Not stated

Not stated

Not stated

iWeb £0 (£90 no VAT if switching from capped to flexi)

£180 (no VAT)

£90 + £25 perinvestment (max

£215) to designateadditional funds (no VAT)

£90 (no VAT)

Not stated

£300 (no VAT)

James Hay Modular iPlan

£100 (no VAT)

£150 (no VAT)

£0 £100 (no VAT)

£0 Not stated

Telegraph Investor


Not stated

Not stated

Not stated

TD Direct £0 £75 £0 Not stated

£75 £250

Trustnet Direct Investing

£204 (no VAT)

£180 (no VAT)

Not stated

Not stated

Not stated

£302

DiRECT pLATfoRmS Henry likes playing the markets and he’s done quite well over the years, building up a pot of around £50k. The time has

come for Henry to enjoy the fruits of his retirement labours and he’s decided that drawdown is the best option for him.

Specifically, he wants to take his maximum tax-free sum of around £12,500 and go on a round-the-world trip to see the

places he’s been investing in all these years. Thereafter he wants to draw a small top-up income, and vary this over time.

He’s all over the new regulations, understands tax implications and so has decided to go direct.

First let’s look at the direct platforms’ overall charging structures and then move onto Henry’s own situation.

Direct Platform Core Charge Drawdown Charges Total % Charge

AJ Bell Youinvest £200 £120 0.64%

Alliance Trust Savings i.nvest £186 £90 0.55%

Barclays Stockbrokers £175 £210 0.77%

Bestinvest £150 £240 0.78%

Charles Stanley Direct £245 £180 0.85%

Chelsea Financial Services £300 £264 1.13%

Fidelity Personal Investing £175 £0 0.35%

Halifax Share Dealing £90 £180 0.54%

Hargreaves Lansdown £225 £0 0.45%

Interactive Investor £176 £204 0.76%

iWeb £90 £180 0.54%

James Hay Modular iPlan £285 £250 1.07%

Telegraph Investor £246 £204 0.90%

TD Direct £390 £90 0.96%

Trustnet Direct £221 £384 1.21%

There’s an element of irony in the most complex charging

structures being aimed at direct investors, but here we are.

In this case, there are a number of event driven charges for

Henry to take into account: flexi-access set up charges

(which can vary depending on whether it’s an internal or

external transfer), annual charges (which can vary

depending on whether regular income is taken) and one-off

payment charges (which can vary depending on the colour

of your socks). And don’t forget the underlying core

charges. And, just when we thought we were done, Henry

should be aware that, in the unlikely event that he got a bit

carried away and cleared out his fund inside of a year, some

platforms will charge – and heavily too.

So, how do our direct platforms look? As you’d expect,

there are stand outs at either end of the scale. Neither

Fidelity Personal Investing nor Hargreaves Lansdown (HL)

apply set up, annual or one-off income charges, which

leaves them sitting alongside Alliance Trust Savings i.nvest

(ATS) and Halifax Share Dealing and looking a pleasing

shade of green, despite HL’s chunky core charges. On the

other hand, an eye-watering combination of core and event

driven charges leaves James Hay Modular iPlan, Trustnet

Direct and Chelsea Financial Services firmly in the red zone.

Fidelity comes up trumps on a purely cost basis but, as we

always say, price isn’t everything and, for Henry, the HL

service experience might well be worth an extra 10bps.

Core charges are based on £50k fed through the lang cat direct engine Charges are inclusive of VAT where applicable

All charges have VAT on top unless stated


Advised Platform

FAD Setup

Annual FAD

FAD One-off Payment

UFPLS Payment

Annuity Purchase

Stripping Out Within

One Year

Aegon Retirement Choices (ARC)

£0 £75 (no VAT)

£0 £0 £0 Not stated

AJ Bell £0 £150 £75 £75 £0 £250

Alliance Trust Savings

£0 £75 £0 £40 £0 Not stated

Ascentric £0 £150 £0 £0 £75 £100

Aviva £0 £0 £0 UFPLS not offered

£0 Not stated

AXA Elevate £0 £0 £0 £0 £0 Not stated

Cofunds £100 £120 £0 £220 £0 £300

FundsNetwork £0 £0 £0 £0 £0 Not stated

James Hay Modular iPlan

£100 £150 (no VAT)

£0 £100 (no VAT)

£0 £150 (no VAT)

Novia £0 £62.50 £0 £62.50 £0 Not stated

Nucleus £0 £0 £0 UFPLS not offered

£0 Not stated

Old Mutual Wealth £0 £0 £0 UFPLS not offered

£0 Not stated

Parmenion £0 £0 £0 £0 £0 Not stated

Standard Life Wrap £0 £0 £0 £0 £0 Not stated

Transact £0 £0 £0 £0 £0 Not stated

Zurich ZIP £0 £0 £0 £0 £0 Not stated

ADViSED pLATfoRmSJulia received a divorce settlement some years back (every penny earned, thank you) which her adviser recommended

would be best in an on-platform SIPP and is now worth £100k. She also has pension rights from the divorce for income,

so she really just needs to be able to call on her fund for ad-hoc lump sums as and when needed. She’s agreed with her

adviser to stick with a platform.

Julia discussed the relative benefits of FAD and UFPLS with her adviser at length. On balance, the fact that FAD gives

Julia a little more control narrowly swung the decision in its favour, although it was a close-run thing. FAD also ends up

looking a little less expensive on many advised platforms than UFPLS – not to mention the fact that some platforms don’t

offer UFPLS at all.

Set up charges are rare for flexi-access drawdown on advised platforms

with only Cofunds and James Hay levying a fee (£100 each but Cofunds

has VAT on top). Even rarer are charges for subsequent withdrawals and

AJ Bell looks a little exposed with its £75 (plus VAT) fee. So, other than

core charges, the real influence on the overall charge outcome for Julia is

the annual FAD charge. Again, not everyone applies these (only about half

of the platforms we looked at) but those who do range from £62.50 plus

VAT (Cofunds) to £150 (AJ Bell, Ascentric – both plus VAT – and James

Hay Modular iPlan – no VAT).

Not surprising, AJ Bell is at the red end of the scale, closely followed by

James Hay, although a hefty core charge sees Aegon Retirement Choices

keeping them company. Core charges also drive the green scene with

Alliance Trust Savings’ annual charge balanced out by the impact of its

fixed fee structure. Conversely, while both FundsNetwork and Parmenion

have a mid-field core charge, their position on the table benefits from an

absence of event driven charges.

Core charges are based on £100k fed through the lang cat advised engine Charges are inclusive of VAT where applicable


Advised Platform Core Charge Drawdown Charges Total % Charge

Aegon Retirement Choices (ARC) £540 £75 0.62%

AJ Bell £416 £270 0.69%

Alliance Trust Savings £186 £90 0.28%

Ascentric £370 £180 0.55%

Aviva £365 £0 0.37%

AXA Elevate £320 £0 0.32%

Cofunds £290 £264 0.55%

FundsNetwork £295 £0 0.30%

James Hay Modular iPlan £375 £250 0.63%

Novia £500 £75 0.58%

Nucleus £350 £0 0.35%

Old Mutual Wealth £387 £0 0.39%

Parmenion £300 £0 0.30%

Standard Life Wrap £550 £0 0.55%

Transact £510 £0 0.51%

Zurich ZIP £425 £0 0.43%


Provider Product FAD Setup/First

Payment

Annual FAD

FAD One-off Payment

UFPLS Payment

Annuity Purchase

Stripping Out Within One Year

Barnett Waddingham

Flexible SIPP £250 £117 £117 £200 £210 Not stated

Curtis Banks The Curtis Banks SIPP

£0 £0 £120 for each payment after

the first

£120 for each payment after

the first

£75 £250

Dentons Pension Management

Dentons SIPP £250 £120 £250 £250 Not stated

Not stated

Hornbuckle Full SIPP £175 (annual) + £50 if

income taken

£175 £50 (if income)

£50 per instruction plus

£175 pa

£200 Not stated

InvestAcc The Minerva SIPP

£100 £100 £100 £100 £100 Not stated

IPM The IPM SIPP £150 £150 £150 £150 Not stated

Not stated

London & Colonial

Simple Investment SIPP

£120 £120 £0 £120 £75 Not stated

Rowanmoor Pensions

Rowanmoor Pensions SIPP

£125 £125 £250 £350 Not stated

Not stated

Sippchoice Sippchoice Bespoke SIPP

£150 £175 £150 £150 £150 Not stated

Suffolk Life MasterSIPP £155 £155 £155 £155 £100 £300

Talbot & Muir Elite Retirement Account

£125 £150 £75 £200 £150 £125

Westerby Trustee Services

Full SIPP

£175 £125 £175 £300 £225 £275

Sipp SpECiALiSTSAn early adopter of SIPPs (back in the day) Sophie has built up £250K and she intends to enjoy it. While this is a chunky fund, her

main source of income will be her employer DB scheme so she’s set this aside to dip into as needed and has decided to go the

UFPLS route, with four separate withdrawals in the first year. The first 25% of each UFPLS will be tax free and the remainder

taxed at her marginal rate. Sophie might have to withdraw the whole fund at some point over the next year as both her children are

looking for properties and she’s promised them each a lump sum in lieu of inheritance – why pay the extra tax, right?

Now, we accept that Sophie’s scenario is unusual – most

advisers might caution against taking so many UFPLS

purely because she’d get hammered on charges. But it’s an

option and it lets us see just how it all stacks up.

Unlike most platforms, SIPP specialists’ core charges are

fixed rather than ad valorem. Like platforms, a range of

event driven charges can apply, but for Sophie we’re just

looking at core SIPP and UFPLS charges.

Both of these vary considerably as we look across the table.

Unlike advised platforms, everyone here charges for UFPLS

– although Curtis Banks helps its position on the heatmap

by letting you have one for free. Charges vary considerably

from £50 (Hornbuckle Full SIPP but with an additional

annual admin charge of £175) to £350 (Rowanmoor

Pensions SIPP) with an average of around £180, all of

which have VAT on top.

And it’s chunky UFPLS fees which pave the road to the red

end of our heatmap, with Westerby Trustee Services Full

SIPP claiming the top spot and Rowanmoor only nudged

into second place by virtue of sporting one of the lower core

fees. Taking everything into account, either will relieve

Sophie of around £2k in the space of one year, just in

charges. Just to GYMBOA5. That’s two Mulberry bags.

Conversely, the two least expensive options overall (Curtis

Banks and London & Colonial) are those with the lowest

core charges, although a bit of restraint with UFPLS fees

plays its part.

Provider Core Charge Total UFPLS Charge Total % Charge

Barnett Waddingham £300 £960 0.50%

Curtis Banks £294 £432 0.29%

Dentons Pension Management £654 £1,200 0.74%

Hornbuckle £630 £450 0.43%

InvestAcc £480 £480 0.38%

IPM £648 £720 0.55%

London & Colonial £239 £576 0.33%

Rowanmoor Pensions £300 £1,680 0.79%

Sippchoice £402 £720 0.45%

Suffolk Life £654 £744 0.56%

Talbot & Muir £504 £960 0.59%

Westerby Trustee Services £660 £1,440 0.84%

Sophie’s options aren’t really limited by the possibility of needing to clear out her pot over

the next year as only four of our SIPPs specify charges for doing so. Of those who do,

charges are no worse than some UFPLS fees. Curiously, both the cheapest option

overall (The Curtis Banks SIPP) and the most expensive (Westerby) levy charges.

Charges include VAT where applicable



5 Get Your Money Back Out Again. Do keep up 007.

For the sake of balance, some lifecos are

very busy making fundamental changes to

their model. But this is a pricing analysis

and so we’re sending them to the naughty

step to have a good think about what

they’ve done. Or not done, as the case

may be.

Aviva and Zurich are conspicuous by their

absence from the table. While they still

have older, insured options available, both

now only actively market new style

platform pensions so they just feature in

the advised platform table.

Platforms have come a long way in recent

years, unbundling fund, product and

platform costs to a point that makes it far

easier for advisers and customers to see

and understand charges. A regulatory

read-across to lifeco products is on our

wish list.

Provider Product Core Charges – what they say FAD Charges – what they say

Aegon One Retirement

Unbundled. 0.3% on the first £250K then 0% on the rest.

£75 per annum

AXA Wealth

Retirement Wealth Account

Net bundled insured AMC ranges from 0.8% – 1.9% depending on funds used. There are 'discounts' ranging from 0.50% to 0.65%

depending on portfolio size.

£150 for a one-off withdrawal. £150 per annum for part withdrawal or drip-feed

drawdown.

Friends Life

Friends Life Flexible Pension Account

Unbundled. AMC ranges from 0.15% to 0.45% depending on portfolio size.

£20 per payment, although the first four payments in a year are free

Legal & General

Portfolio Plus Pension Income

Withdrawal

Unbundled. The AMC ranges from 0.1% to 0.5% depending on portfolio size.

£0

LV= Flexible Transition Account

Unbundled. AMC ranges from 0.10% – 0.25% if us-ing insured funds. If using wider investments, it ranges

from 0.10% to 0.55% – all depending on portfolio size.

Initial fee of £295 for funds < £50K, £175 > £50K

Old Mutual Wealth

Personal Pension Income

Plan

Unbundled. 0.25% regardless of portfolio size. £150 per annum

Prudential Pru Flexible Retirement Plan

The AMC is bundled and ranges from 1.45% to 2.35% depending on funds used. There are

'discounts' ranging from 0.10% to 0.30%, depending on portfolio size.

Not stated

Royal London

Pension Portfolio

Income Release

Bundled. The AMC is 0.90%, this is reduced by 'discounts' from 0.40% to 0.55% depending on

the portfolio size.

One-off charge of £184

Scottish Widows

Retirement Ac-count

Unbundled. The service charge ranges from 0.10% to 0.70% depending on portfolio size.

No fixed costs (the core charges for those in drawdown are slightly higher

than accumulation accounts)

Standard Life

Active Money SIPP

The AMC is bundled and ranges from 1% – 2% depending on funds used, plus a yearly admin charge of £303. There are 'discounts' ranging from 0.3% to

0.5% depending on portfolio size.

No charge if in level 1 and 2 assets. Initial / ongoing fees of £189 / £146

for level 3 assets.

LifE CompANiES Right, here we go. Deep breath. Calm blue ocean.

So, we said that we were going to create a sample persona for each channel, but the eagle eyed among you will no doubt

notice that this section is distinctly sans-heatmap. Not a green, amber or red hue in sight.

The truth is that wading through lifeco rhetoric and trying to achieve a level playing field for calculations drove us as

close to an existential crisis as we like to get here in Leith. That’s not to say lifeco charging structures are especially

complex. It’s just that unpicking the opacity of them to make a fair like-for-like comparison felt contrived to the point that it

didn’t pass our sniff test.

The main problem lies in a good chunk of providers still bundling together product and fund costs, often with a series of

discounts and bonuses thrown in. We’re not comfortable positioning a product with the cost of underlying investment

thrown in alongside another that unbundles. Less ‘How do you like them apples?’ and more ‘Let’s compare that apple to

that other apple. Oh hang on, that’s a 1957 Studebaker Golden Hawk’. So we didn’t.

What you see here, then, is a table outlining the main providers in the lifeco (mostly insured) drawdown market and our

interpretation of each provider’s core product and additional (if any) drawdown charges. We think a summary like this is

still useful.


Here’s where it all gets difficult.

The Treasury, like a toddler realising he shouldn’t have

picked permanent marker for drawing on the wallpaper,

knows in its heart that extending pension ‘freedom’ to those

who have already bought their annuities is taking things a bit

far. Even if it won’t admit as much.

It’s all there in black and white, in the prose of the

consultation on proposals. This contains whole paragraphs

that make you wonder why they’re bothering with it at all. If,

like us, you’re suspicious that this wouldn’t even be mooted

in a non-election year then You Are Forgiven.

Steve Webb started talking about second hand annuities

last year, keen to ensure that existing annuity holders could

take advantage of new pension flexibility and, if they’re lucky,

get to experience the thrill of being ripped-off all over again.

We’ll come back to that.

The consultation on the proposal was launched in the 2015

Budget, though consultation is possibly not the best word for

it. We’d favour ‘Invitation to tell us why this is a crazy idea’.

Anyway, anyone planning on responding to the consultation

and struggling to spell out their concerns will find plenty in

the document to help them.

• Not sure whether it’s a good idea for existing annuity

holders? Nor is the Treasury: “The government believes

that for most people, keeping their annuity income will be

the right decision – allowing them a stable and guaranteed

retirement income.”

• Not sure if it’s a good idea for people who might want to

buy an annuity on the secondary market? The Treasury is

right there with you: “The government does not consider

annuity income purchased on the secondary market to be

an appropriate investment for retail investors owing to the

complexity and difficulty in determining a fair price...”

So let’s recap. Selling an annuity probably isn’t a good idea,

and buying one definitely isn’t.

if LEmmiNGS WRoTE CoNSULTATioN pApERS Anyone would think the government actually wants the

consultation to kill the plan stone dead. Still, it wouldn’t have

got this far if there weren’t clear benefits (for someone

outside Westminster). Take existing annuity holders for

example. We can think of…er, no real...oh, hang on, maybe

a choice thingy…no. No, it’s gone. No benefits at all.

A few drawbacks spring to mind however, and without very

much chin-stroking. The most obvious, perhaps, is the loss

of value to the existing annuity holder. They lost plenty of

value in buying it in the first place, in the form of direct and

hidden charges. Now they’re re-entering a market well

versed in the ways of fleecing them, with yet more charges

and extra costs (such as for underwriting) adding to the

amount sliced off the value of the contract.

An annuity bought and then sold on the secondary market a

week later would lose about a fifth of its value, reckons

KPMG, though we reckon it’s closer to double that.

And it’s this that’s behind our ‘rip-off’ comment above. Ned

Cazalet, author of the authoritative6 When I’m Sixty-Four

report into annuities, reckons that annuitants lose about

20% of the monetary value of their fund by annuitising.

Unless the industry fancies applying for charitable status,

we’d bet a decent whack of the lang cat Strategic Gaming

Reserves that you’d be caught for about the same again on

the way out, along with a tax charge (no phasing available in

flexi-access/UFPLS style here).

If someone does get a good deal it probably means they

shouldn’t sell it because the income was locked in at a time

when gilt yields were pretty attractive. But they’ll get advice

first, won’t they? Will they? There’s a decent chance that

even if they were in an advice relationship, the annuity

purchase might have been the cut-off point. Few people will

pay for advice purely on selling their annuity, even if that

avenue remains open to them. If they do – and they may

have no option depending on the final rules – that’s yet

another cost to factor in.

From what we can see, the only way this market works to a

consumer’s benefit is if she is able to exploit information

asymmetry – mainly knowing that she is going to die soon

and convincing the company purchasing the annuity that she

isn’t. That doesn’t sound like a great idea to us.

There’s a whole bunch of other things to think about too:

• Would someone selling a joint life annuity (assuming he

needs/has the permission of his spouse) be selling the

spouse’s benefit too, for example?

• Would sellers need to meet minimum income

requirements?

• If new underwriting is needed would they need to

pay for this even if they decide not to sell?

• What happens to purchase prices in light of the

EU Gender Directive, especially for the fellas?

• Is there a cooling off period?

• How do you ensure that an older person isn’t

being coerced?

And so on.

Those sellers that do benefit – such as those needing to

switch from, say, a single to a joint life policy – will be in a

small minority, as even the Treasury admits. The Institute for

Fiscal Studies agrees, suggesting a second-hand annuities

market is unlikely to emerge due to “the significant problems

of ‘adverse selection’”.

WHAT’S iT ALL ABoUT THEN?Very briefly, the idea is to let people sell their annuities to

a third party and use the cash proceeds – which would

be taxed at their marginal rate – any way they like,

perhaps to buy a more flexible annuity, a flexi-access

drawdown plan or a debauched weekend in Amsterdam.

The most likely buyers would be life offices and pension

funds, though providers wouldn’t be able to buy back

annuities they had sold.

AND THE GooD NEWS?Ok, what about providers? If it’s bad for consumers then

there must be some benefits for the industry – isn’t that how it

works? Such cynicism! Annuity providers might, if the market

becomes viable, benefit from an increase in demand as

people realise buying an annuity doesn’t necessarily lock

them in. They could view second-hand annuities as potentially

providing a handy stream of revenue that helps cover the

pensions they’re still paying out. But to really make it work

they’ll need to buy in bulk, and they’ll need to work out a way

of buying and pricing that keeps the regulator off their backs.

Pension funds and investors may also see decent returns

in aggregated annuities packaged up and sold as funds

offering a longevity hedge. Anyone who remembers the fate

of traded life policy investments – better known as ‘death

bonds’ – will see where this could end. Those products

ended up being banned, on the basis that they were ‘toxic’.

A ringing endorsement if ever there was one. It’s rare that a

piece of legislation offers no clear wins for anyone. But this

comes darn close, which is why it’s destined only for the

long grass. Well, until the next election anyway.

ANNUiTy foR SALE oNE pREVioUS oWNER LoW miLEAGE

Those who fail to learn from history are doomed to, blah blah, all that sort of thing. In

the end, we’re looking at a market where people with relatively low value assets go

through a highly frictional and likely expensive sales process, which will need multiple

checks and balances. And probably advice. Which most won’t want to pay for and

many won’t be able to pay for, even if they can find advisers who want to advise on it,

which they won’t. So unless we fancy going through life settlement funds or the

collateralised mortgage market again, this market’s a bad idea.

We think enough others are of a like mind – including a number of high profile

insurers – that it will be a rich source of debate, and may even spark some new

products (such as MGM Advantage’s new money-back annuity product) but will

never see the light of day. For after all, if someone wants to lose 40% or more of

their retirement savings, there are more fun ways to do it; many of them during

that weekend in Amsterdam.

But enough of what we think, Platform Man wants a word...


6 Long.

THE LANG CAT ViEW

SCENE 94 – THE NEW ADVENTURES OF PLATFORM MAN

INT – A conference venue lobby, the kind with no natural light and with a carpet

which has been designed to gouge your brain out through your eye sockets. THE LANG

CAT sits, semi-slumped, skiving out of the ‘Whither Bid-Offer Spreads?’ panel debate,

in a chair which is comfortable for exactly 18 minutes and then excruciatingly

uncomfortable. PLATFORM MAN takes a seat opposite THE LANG CAT. Pension freedoms

have put a new spring in his step, as he’s been moved to the ‘Decumulation

Innovation Committee’ or DIC, and is #delighted to be putting his product innovation

skills to good use.

PLATFORM MAN: Well, hello! It’s been a while, hasn’t it? ExpandingIseenoaccountin

gfortastehahahaI’mjokingobviously have you noticed on Linkedin that

I’m now heading up our Decumulation Innovation Committee with special

responsibility for secondary markets?

THE LANG CAT: No, I missed that, although I did see it was your birthday on April

12, so congratulations on that.

PLATFORM MAN: Indeed, although there’s no time for birthdays what with all the

innovating we’re doing, especially in the secondary markets, as I’m

sure you can imagine! That said, in one way all the birthdays have

come at once! For clients, I mean, of course!

THE LANG CAT: You’re not doing the buying and reselling annuities thing, are you?

I’d have thought that was too risky even for you.

PLATFORM MAN: Well, that all depends on the amount of innovation we can bring

to this new and very exciting market. It’s all about choice for

individuals and opening up the valuable freedoms that people retiring

now enjoy, and escaping poor value annuities from the past.

THE LANG CAT: Didn’t you sell them those annuities in the first place?

PLATFORM MAN: No, no, our annuities have always been excellent value; as you know

it’s about value not price and our analysis shows we deliver 14.7%

more value per annuity despite our rates being only 89% of market

average on a rolling 14-month timeframe. That’s obviously not for

including in one of your funny funny reports.

THE LANG CAT: I wouldn’t dream of it. But wouldn’t you agree that – as Cazalet

suggests – individuals have already taken a fair old doinking on the

way into their annuity? Surely you’re just going to hammer them again

on the way out?

PLATFORM MAN: (pressing his point home) No, you’ve misunderstood the entire dynamic of

this. It’s all about value, you see? The second-hand annuity market will

provide a welcome source of capital value to us, I mean shareholders, I

mean clients.

THE LANG CAT: (pressing the point right back) See, that’s the whole point! This

works for you and not for clients! And then you’ll just package the

damn things up, resell them, collateralise them and it’ll be an unholy

mix of CDOs and life settlement funds! Who wants that? Only people

who’re worried about their profitable back books disappearing at a rate

of knots!

PLATFORM MAN: Lots of people, Mr Clever-Clever Cat Man. Especially our owners.

Of whom you are one. Where is your meagre, shrivelled pension pot

invested again? You own us. We own you. You are us. We are you. You

are ONE OF US. ONE OF US. ONE OF USSSSSSSSSSS.

THE LANG CAT recoils in horror as PLATFORM MAN’s features melt away, to reveal a green-skinned lizard with glowing gold eyes. A slithering sound makes THE LANG CAT turn round. The lobby is now full of lizards in suits. A chant of ‘GOOBLE, GOBBLE, ONE OF US’ starts, showing that mixed film references are fine in skits like this, something which is only exacerbated when THE LANG CAT runs to the door only to see a large wicker cat outside. Lizards line the way to it, swaying and chanting with flaming torches.

THE LANG CAT: No! I recant! You’re right! Consumers deserve everything they get! Your share price is the most important! I long to participate in the tertiary annuity market! Aiiieeeee!

THE CAMERA PANS AWAY FROM THE DISTRESSING SCENE. The panel discussion on bid/offer spreads continues, forever.


GHoSTS of pENSioN mARKETS yET To ComE: LESSoNS fRom ABRoADThe new business performance of an Australian lifeco wouldn’t normally be on our radar but, amid the fevered pre-6 April industry hunkering and clenching, Australia’s biggest annuity provider, Challenger, posted half-year results that were well worth a look. Record annuity sales, with retail new business up 8%, offered the latest cautionary tale on pension freedom from a country beginning to absorb lessons from its own wide-ranging reforms. CEO Brian Benari warned that industry innovation in longevity products “shouldn’t come at the expense of retiree safety”. Challenger, which says its average annuity sale has more than doubled in size over the last decade, expects annuity sales to continue rising in a market where the government faces calls to reintroduce some forms of annuitisation just as the UK goes in the opposite direction.

THRoW ANoTHER SELf-mANAGED SUpERANNUATioN pLAN oN THE BARBiEOn the face of it, the Aussie pension system appears

successful. Favourable tax policies and the compulsory

pension system introduced in 1992 have helped Australia

build up the world’s biggest pot of managed fund assets per

capita. Its savings culture is one the UK can only dream of.

But it’s not all positive. ‘Massive numbers’ of people are

bailing out of their retirement accounts in their mid-60s and

instead piling into self-managed superannuation funds

(SMSFs – nearly wins at acronyms but narrowly misses out

to UFPLSs), which are now the biggest single component

of the Australian pension system. We know there are

concerns that the UK might head in this direction so what’s

behind the move from the consumer perspective?

The language those retirees use is one of taking

‘control’, according to Paul Resnik, co-founder

of Australian risk tolerance experts FinaMetrica.

It’s nonsensical. They’re not in control, they’re

running a high risk formula they don’t

understand.”

Almost all of SMSF money is invested in

Australia, with about 70% in growth assets,

creating a “huge concentration risk”, says

Resnik. “When I ask people why, they say it’s

because they want to be in control and invest in

what they understand. But if you haven’t done it

professionally you won’t have a clue how to do it

properly – you can have no notion of the risk

being taken.

The big SMSF inflows have come largely since the financial

crisis, meaning few SMSF investors have experienced a

bear market. When Australia does experience a correction

those retirees will be hit and hit hard. The problem is both

caused and compounded by a dislike of financial advisers,

Pauline Vamos, chief executive of The Association of

Superannuation Funds of Australia, has warned.

“We are seeing trends across the world, including in

Australia, in terms of where advice is going and we know

that over the next few years the vast majority of advice will

be self-guided advice. Australia is all about do-it-yourself,

they hate advisers, they hate intermediaries,” she told last

year’s National Association of Pension Funds conference.

The Murray Review, which is investigating the country’s

financial system, revealed that one in four Australians run

their pots down by age 70. It found that 44% of people use

their pension cash to pay off housing and other debts or to

buy a property, while nearly three in 10 spend it on holidays

or new cars. Consequently, the report warned, there is now

an issue with “seriously depleted pension funds as a result

of the freedom to invest”. While we can only comment on

people’s intentions (which aren’t exactly a fool-proof

indicator of actual behaviour) the UK seems to be more

concerned about security and longevity of income than

taking control. Perhaps lessons are already being learned.

Or perhaps we’re just much more pessimistic than our

counter-parts down-under. Probably the lack of vitamin D.

So what can the UK learn from the Aussie experience?

What does ‘good’ look like in the brave new pension world?

Ideally it would include affordable products that help people

manage longevity risk and provide some element of

guarantee. Without effective longevity risk management

options – identified by the Murray report as a “major

weakness” of the Australian system – those warning that

Brits will deplete their pensions too soon will be able to say

‘we told you so’.

More than 20 years after relaxing access to pensions the

retirement phase of Australia’s pension system is

“underdeveloped”, according to David Murray, with too few

products helping people mitigate longevity risk. This is a

pretty damming judgement – but can we avoid falling down

the same dingo hole in the UK? Actually, do dingoes sleep

in holes? Only if there’s no hotel rooms available. A little

dingo joke there.

So, what are they planning to do to improve the situation

down-under? The Murray report has proposed the creation of

a ‘comprehensive income product for retirement’ at the point

of switching from accumulation to decumulation and which

would blend an account-based product with an annuity-style

element. But developing an annuities-type market will be

tricky, not least because the 1992 revolution spelled the end

for Australia’s life offices. “We don’t have life offices, the

reserves or the expertise so it’s not possible to return to

annuitisation,” says Resnik. So what does he think the UK

needs to do to ensure the success of pension freedom?

‘Good’ looks like an industry that manages to avoid alienating

its customers. The key lies in engaging savers so they don’t

desert the industry and go it alone. “It’s not about financial

literacy. The industry has to work hard to say ‘this is your

money’ and get them actively involved,” he says. “The big

thing to do is work hard on engaging people. Innovation

will be in engaging people, you’ve got to build

relationships with people wherever you are in the sector.”

STARS, STRipES AND 401K pLANS Australia’s not alone in offering pertinent lessons from the

experience of opening up pension freedom. But perhaps the

US offers a slightly more upbeat example. The US, like

Australia, is a mature DC market in which investors have

long enjoyed far greater flexibility than those in the UK.

There’s only so much to take from comparison with the US,

given annuities have never been the cultural norm across the

pond, but there are some behavioural pointers to chew over.

Most people wait until they are 70.5 before taking cash from

their personal retirement accounts; the age ‘minimum

distributions’ have to begin. Just 18% of people aged

between 60 and 69 raid their retirement accounts in a given

year, according to State Street research and just 7% take

more than 10% of their total pot. Even after the age of 70.5

the percentage of balances taken is around 5% a year. But

even in the US there are concerns that too many people are

outliving their savings. Deferred annuity contracts have been

introduced to the default investments in 401k plans

(retirement accounts) and tax relief is being offered on them

in a bid to accelerate take-up.

There’s a lot to learn from the experience of the US and

Australia, both in terms of what good might look like and the

mistakes to avoid. The unavoidable theme is that people can

and do run their funds down to zero. It’s been talked about

over here but we can see the reality and impact in Australia

and, to a lesser extent in America. The UK would do well to

heed these lessons. Australia is past being able to turn the

ship around but the UK still has scope to avoid getting into

those well charted, if shark-infested, waters in the first place.


pRoViDERS The assumption among providers appears to be that taking

money out of pension savings is actually good for

encouraging the act of saving. Drives engagement, don’t

you know. If you’re engaged, you’ll save more money with

us. Just taking the fund and not saving more with us? Hmm,

well, you’re just not engaged enough, are you?

Meanwhile, back in the real world…

Lifecos in particular will experience outflows that were never

part of the plan. Much of this will be from older products,

the ones which propped up PVNBP calcs (remember

them?). Allowances were made for early exits but nothing

on this scale. That drop in AUA will create more issues than

a certain high profile boy-band resignation.

Not to worry! People know they can access their money (they

proved that by taking it out) and that will make them engaged

so they’re bound to invest more money with us. Phew! Right?

Well, no. At least we found nothing to support that theory in

any of the research we looked at (and there was a lot of it).

Don’t confuse new potential for decumulation with a boost

for accumulation. The two aren’t correlated and there is no

fast track to getting people to engage with saving. A bit of

excitement in the mainstream press does not an

accumulation market resurgence make.

That this drain is laser-targeted at siphoning off the most

lucrative element of XYZ Life’s back book is another source

of pain. It’s a fact that the older contracts will go first; either

externally or internally to newer, less profitable products.

How can that business – or more critically the value of that

business – be replaced? It won’t be with more of the same,

that’s for sure.

For more modern providers, platforms mainly, ISAs have

been gaining ground as the retirement income top-up

mechanism of choice among cats of many degrees of

fatness. Which raises the question of the degree to which

pensions and ISAs are really distinct from one another?

From the investor’s perspective it’s a balancing act of

additional charges against the advantage of tax relief; on

paying tax at source or on the proceeds.

But that tax relief means an extra 20% of charges for the

provider. Yay SIPPs! The administration of a SIPP is more

complex than that of an ISA, but can differential pricing

really be justified? If we are approaching a point where

pensions and ISAs are increasingly interchangeable then

why not one single charging structure across the whole pot

(for those who don’t already)?

CoNSUmERS You can’t make people engage with something when they

don’t want to, or don’t feel that they need to. People will

choose to engage if something meets a need, grabs their

attention and works in their favour.

Just like teenagers who wanted their own front door keys

and no stupid curfew (Muuuuum, like, how, like, unfair is

that?) investors have long wanted access to their pension

pots. Or so the government keeps telling us. We’ve looked

through a lot of consumer research in the process of writing

the Guide (we might have mentioned) but that need, that

urgency of wanting access and control has never really

been much in evidence. Options, yes. Not being stuck with

an annuity, absolutely. Limitless access, not so much.

Anyway, whether they wanted it or not, investors now have

the freedom to access their pension; the key to that

particular door. They have freedom but what they lack is

protection; specifically from the scammers who are busily

setting up shop, but also from something as simple yet fatal

as poor decision-making.

We’d argue that, unless an individual has other sources of

income, and guaranteed ones at that, can they be sure that

they aren’t going to run out of cash? Remember all that

consumer research we ploughed through? Guess what kept

cropping up?

We’re not doubting anyone’s intelligence. Not at all. A lot of

good people have made it this far without coming a cropper

whilst working bread out of a toaster with a metal knife.

Healthy pension pots have been accumulated and

maintained. Mid-level newspaper sudoku is totally doable on

the bus. But none of that helps with the maths of how long

we might live (OK, perhaps the toaster thing), and how much

we’ll need to live on during that time.

We can’t help our engrained fatalism. We’re British, after all.

What we can help is the timeframe we attach to the context of

retirement planning. So, if you’re an investor with a pot of, say,

We’re all familiar with this saying, usually from those who are older and wiser than us and can see that whatever we’re hankering after is A BAD IDEA. Like growing older itself. That’s not a bad idea, quite the opposite. No, it’s the way we rush it. When we’re kids it’s all about being adults; staying up late and not being nagged to tidy your room.

It never turns out that simple, though, does it? It’s less beer,

late night movies and X-rated assignations with comely

persons of your chosen gender and more worrying about

paying bills; trying not to damage your kids so badly they’ll

choose a really bad care home for you, checking the

pension statement and regular attendance at the Sub-

Steering Group for Strategic Product Alignment.

But then, one day, ah, one day you get to reap the rewards of

all that boring savings stuff. That’s something to look forward

to, isn’t it? And now you can get your hands on the whole lot

at 55 with no limitations. You don’t even need to retire.

So how does this affect our key players in the newly freed

up pension landscape?

ADViSERSAll things considered, we think advisers are doing OK. It’s

always been a tough gig and and in some ways it’s getting

tougher, with new rules, new(ish) products and funds and a

new wave of consumers who are either more clued up

about the whole thing or just think they are.

One big challenge for advisers at this particular moment is

that there’s just so much noise in the background. And

while that noise might be all kinds of interesting, it’s a

distraction and can pull you away from the number one

priority of carrying out your duty to clients and protecting

their best interests. If you’re finding this more of a struggle

that you had anticipated, TPAS probably has vacancies.

For those not planning a career change, we’ve gone a bit Zen

and come up with the lang cat’s serenity prayer for advisers:

Pretty deep, huh? No matter how interesting you find it,

pensions policy is not an adviser’s job. Looking after the client

is. There are clues. Being called ‘an adviser’ for a start. It’s just

a case of digging deep and finding the serenity to accept it.

There is a very real chance that some, maybe many,

consumers will run out of money during their retirement. The

chances of this happening are reduced by sound financial

advice. Very few of the investors calling up providers to

discuss their options are in an active advice relationship. If the

prize is a financially sound retirement for your client, then we

think it’s definitely one to keep your eye firmly on.

BE CAREfUL WHAT yoU WiSH foR:fiNAL THoUGHTS

The Adviser’s Serenity prayerMay the FCA grant me the:

Grace to refrain from entering into protracted

comment threads on trade press articles about

regulations that cannot and will not be changed,

Courage to focus my attention and resources on

the current and future financial well-being of my

clients, which can be changed (for the better)

And the wisdom to not only know, but to

acknowledge and act upon the difference.

RUNNiNG THE NUmBERSGuaranteed income is a priority for 70% (ILC)

75% favour a secure guaranteed income over one linked to the markets (ILC)

41% worry about outliving their retirement income (MetLife)

25% intend to secure long-term guaranteed income with an annuity (NAPF)


£40K with £10K earmarked for a new kitchen, the context for

that remaining £30k might be ‘Will it last me until I’m 90?’.

Advisers use a similar planning window as a matter of routine.

This is something providers can and should be picking up on,

particularly in the direct market. Less focus on scenic

locations for older people to look happy and more on

encouraging the thought process of ‘Will it last me until I’m

90?’ will be much more effective in encouraging consumers

to take control of their own retirement income destiny.

END TimESIn putting this report together, we’ve found reality clashing with

theory on many occasions. Public spokespeople for providers

cry one, idealistic, version of the truth; those battling to get

through to the call centre cry another. We’re not surprised by

that – it was ever thus, but we wish it were otherwise.

We said it earlier, but having been in and around the

pensions market for (collectively) something like 150 years,

it strikes us at the lang cat that the pensions market is

reaping what it sowed. The strictures, opaque charging

structures, awful investment options and indecipherable

terms and conditions of far too many policies have

contributed to a quite understandable desire for consumers

to get the hell out of here. We don’t blame them one bit.

Maybe none of it matters. We’ll (probably) have some form

of Universal Credit, which everyone will get (it being

universal, you see). If you spend your pot wisely and have a

comfortable retirement as a result, good for you. If you spaff

it all away in 2 years on hookers and Columbian marching

powder, good for you. You won’t be falling back on the state

any more than anyone else.

But in the meantime, it turns out that what we have to do to

stop the worst excesses (and the lang cat’s Third Law of

Embuggerment) is just to care about the poor sod at the end

of the line. Something the industry has outsourced to

advisers for a long time ends up being the core competency

more valuable than any other.

Let the legacy of this extraordinary period be that the

pensions industry allowed its navel to go unregarded for a

time, while it attended to the needs of the people whose

money makes it exist in the first place.

No, us neither.

if yoU Do NoTHiNG ELSE, Do THiS…

CoNSUmERS• Assume you’ll see your 90th

birthday and that whatever

pension pot you have must

see you right at least until

then. Most people appear to

share the desire for security

but without quite grasping

how long regular income

needs to last.

• Part of achieving this is always

assuming that any offers of

‘assistance’ in accessing your

pension which sound too

good to be true are just that.

Big one-off purchases or cash

withdrawals might also seem

like a good idea now but think

about the impact on Project

Paying the Bills at 90. Proper

advice is a big part of this.

pRoViDERS• Don’t assume consumers will engage with

you or your products, just because you think

they should. It’s up to them and they will

decide. Remember what Paul Resnik said:

“The big thing to do is work hard on engaging

people.” It’s not something that just happens.

• Look at your proposition from the consumer’s

point of view and ask yourself – is that what

they really want? Does it meet their needs?

And at a price that’s fair to them? What

makes it stand out from all the very similar

offerings in the market?

• Learn from this. Business predicated on

impenetrable terms and conditions, that ties

people in contractually will, eventually, turn

and bite you on the ass.

• For those still prevaricating on publishing

charges: get it sorted. And publish in a form

which makes it easy for advisers and clients to

compare.

ADViSERS• Ignore the noise. It’s all about the

client, their needs, priorities and

well-being.

• Focus less on worrying about

providers stealing your clients and

more on fulfilling their advice needs.

A client in an effective advice

relationship will not be calling up

providers to discuss their options.

• Your target clients will almost

certainly behave themselves. But

beware the ‘long tail’ of clients who

aren’t in your ‘A’ list – are they

heading off the reservation?

• When sending newsletters or

communications about pensions

freedom, keep it very basic. No-one

needs to hear about UFPLS. The

simple tax treatment of encashment

should be message 1.

Oh cryin’ won’t help you prayin’ won’t do no good

Oh cryin’ won’t help you prayin’ won’t do no good

Whenever the levee breaks mon you got to lose


do what you lovewww.langcatfinancial.com

when the levee breaks - the lang cat

Documents